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Multi-level marketing businesses function by recruiting salespeople
(also called Distributors, Independent Business Owners, IBOs,
Franchise Owners, Sales Consultants, Beauty Consultants, Consultants,
etc.) to sell a product and offer additional sales commissions
based on the sales of people recruited into their downline,
an organization of people that includes direct recruits, recruits'
recruits, etc. This arrangement is similar to franchise arrangements
where royalties are paid from the sales of individual franchise
operations to the franchisor as well as to an area or region
manager, but in some MLM programs, there can be seven or more
levels of people receiving royalties from one person's sales.
Contents
1 Legitimacy
2 History
3 Compensation plans
4 Criticism of MLM
5 Notes
6 See also
7 External links
Legitimacy
Multi-level marketing has an image problem due to the fact
that it is often difficult to distinguish legitimate MLMs
from illegal pyramid or Ponzi schemes. MLM businesses operate
in the United States in all 50 states and in more than 100
other countries, and new businesses may use terms like "affiliate
marketing" or "home-based business franchising".
However, many pyramid schemes try to present themselves as
legitimate MLM businesses.
In the most legitimate MLM companies, commissions are earned
only on sales of the company's products or services. No money
may be earned from recruiting alone ("sign-up fees"),
though money earned from the sales of members recruited is
one attraction of MLM arrangements. If participants are paid
primarily from money received from new recruits, or if they
are required to buy more product than they are likely to sell,
then the company is a pyramid or Ponzi scheme, which is illegal
in most countries.
New salespeople may be required to pay for their own training
and marketing materials, or to buy a significant amount of
inventory. A commonly adopted test of legality is that MLMs
follow the so-called 70% rule which prevents members "inventory
loading" in order to qualify for additional bonuses.
The 70% rule requires participants to sell 70% of previously
purchased inventory before procuring new orders. There are
however variations in interpretations of this rule. Some attorneys
insist that 70% of purchased inventory should be sold to people
who are not participants in the scheme, while many MLM companies
allow for self-consumption to be a significant part of the
sales of a participant [1]. The Federal Trade Commission offers
advice for potential MLM members to help them identify those
which are likely to be pyramid schemes.[2]
History
The 1980s saw a major shift as companies began managing the
stocking and distribution of products as well as commission
payments to their members. This allowed members to focus on
selling. Today, most MLM companies act as logistics companies
that take orders, ship products and calculate and pay commissions.
With the arrival of the Internet, MLM companies have started
to go online. Many established MLM companies began to use
the Internet to promote their products. At the same time,
many other new MLM companies started their businesses using
the Internet, a model which may also be referred by some as
online MLM.
Compensation plans
Companies have devised a variety of MLM compensation plans
over the decades.
Unilevel or Stairstep Breakaway plans are the oldest and
most popular. They feature two types of distributors -- managers
and non-managers -- and three types of pay:
Baseshop overrides are overrides of managers from their subordinate
non-managers, collectively called a baseshop. This is the
same as any other sales organization.
Generational overrides are overrides of managers from the
baseshop of managers who were previously their subordinate.
Most plans compensate at least three generations of such managers.
Executive bonuses are commissions for managers who exceed
a sales quota. For example, 2% of the total company sales
revenue may go to a bonus pool that is shared monthly pro
rata to managers who exceed $10,000 in that month.
Matrix Plans limit the width of each level in a distributor's
group, forcing strong distributors to pile ("spillover")
their recruits over people who did not sponsor them.
Binary plans limit the width of each level to two legs. Commissions
are based on "cycles," where a distributor is paid
a fixed amount whenever both legs achieve a certain number
of sales units each. Commissions are paid incrementally when
the sales volume in each leg matches.
Elevator or Matrix schemes feature a board or a list on which
each distributor pays in one or more product units to participate.
When a certain number of units have been paid in, the structure
splits and the earlier participant receives consideration.
The Matrix scheme article discusses the legality of this plan.
Criticism of MLM
The FTC issued a decision, In re. Amway Corp. in 1979, which
indicated that multi-level marketing was not per se illegal.
However, Amway was found guilty of price fixing (by requiring
"independent" distributors to sell at the low price)
and making exaggerated income claims.[3]
The Federal Trade Commission advises that multi-level marketing
organizations with greater incentives for recruitment than
product sales are to be viewed skeptically. In April 2006,
it proposed a Business Opportunity Rule intended to require
all sellers of business opportunities—including MLMs—to
provide enough information to enable prospective buyers to
make an informed decision about their probability of earning
money. FTC trade regulation rules usually take 1-1/2 to 3
years before a final rule is established.
Criticisms have been raised against MLM programs for being
cult-like in nature. Many MLM programs feature intense motivational
programs, which can be hard to distinguish from cult propaganda.
Criticism of Amway as a cult have been regarded as largely
baseless, though some of the "Independent Business Organizations"
within Amway have been accused of operating as cults.[4]
Another criticism is that MLM programs are set up to make
most distributors fail, as there is a continued incentive
to continue to recruit distributors even as the products have
reached market saturation, thus causing the average earnings
per distributor to continue to fall.[5]
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